A fundamental aspect of corporate real estate optimization is to minimize spending. Lease math can be very complicated and whenever anything changes, there's always a risk that your landlord will make a mistake. When these mistakes occur, it's usually going to be in their favor instead of yours. With this in mind, here are four scenarios in which you must absolutely conduct an audit:
1. When Gross Lease Expenses Decrease
Most landlords and tenants assume that expenses will go up every year. However, this isn't always the case. With landlords aggressively contesting property taxes and rebidding vendor contracts as a part of their effort towards corporate real estate optimization, expenses can decrease. The increasing supply of domestic natural gas has also put downward pressure on heating bills in many parts of the country.
With a triple net lease, these expense reductions should get passed through. With a full service gross lease, they stay with a landlord. However, if you have a full service gross lease with expense stops, it's entirely possible that the expense reduction could drop the building's operating expenses under your stop. Sometimes, the landlord will forget to adjust your rental payments when this happens. The only solution to this problem is an audit.
2. When Rent is Based on CPI
If your lease has CPI-based increases (or based on a different index), calculating them can be complicated. Sometimes, landlords choose the wrong index, which can lead to an excessive increase. They might also fail to properly apply CPI caps, which could also lead you to have excessive rent in years with high inflation. Furthermore, because CPI increases build on each other, a small mistake in one year can carry forward, be compounded, and turn into a significant discrepancy in your overall rent after a few years. An audit is a powerful way to achieve corporate real estate optimization by catching and fixing errors.
3. When Operating Expenses Increase or Exceed Budget
A professional manager should be able to predict the building's operating expenses and should maintain the building so that it doesn't require unexpected repairs. If expenses spike, or exceed budget, it could be a sign of a problem. Sometimes, it means that the owner isn't doing their job of managing the property. If vacancy goes up, it could be a sign that the owner is trying to shift some of the vacant space's expenses to existing occupants. In any case, an increase that is unexpected is usually an indication that you should conduct an audit.
4. When Estoppels Are Coming
Whether your owner is refinancing the building or selling it, the estoppel certificate that you might get asked to sign hides a deeper legal peril. Once you sign the estoppel certificate, you are making a legal statement that the lease you are currently paying is correct and current. If the owner has been overcharging you, the estoppel could give those overcharges the force of law.
Before signing an estoppel certificate, audit the lease. This way, if there are any problems, you can get them fixed. Also, you might find that you have a particularly strong negotiating position since your landlord will probably be motivated to get the problem fixed without having his loan or sale impacted. There are many different ways to achieve corporate real estate optimization. Before taking measures like moving or making major capital expenditures, a lease audit can be a fast and inexpensive way to achieve savings.
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